![]() ![]() What is Included in the Cost of Goods Sold? $10,000 Beginning inventory + $25,000 Purchases - $8,000 Ending inventory What was its cost of goods sold during the month? The answer is: The formula is:īeginning inventory + Purchases - Ending inventory = Cost of goods sold Example of Calculating the Cost of Goods SoldĪ company has $10,000 of inventory on hand at the beginning of the month, expends $25,000 on various inventory items during the month, and has $8,000 of inventory on hand at the end of the month. Ending inventory is the amount counted as being on hand at the end of the reporting period. Purchases made during the reporting period include all raw materials, components, and merchandise acquired from other parties during the period. Beginning inventory is the value of the raw materials and finished goods in stock at the beginning of the reporting period. The cost of goods sold is derived by adding together beginning inventory and all inventory purchases made during the reporting period, and then subtracting out the ending inventory balance. It does not include any general, selling, or administrative costs of running a business. In a retail or wholesale business, the cost of goods sold is likely to be merchandise that was bought from a manufacturer. In a service business, the cost of goods sold is considered to be the labor, payroll taxes, and benefits of those people who generate billable hours (though the term may be changed to "cost of services"). Direct labor and direct materials are variable costs, while overhead is comprised of fixed costs (such as utilities, rent, and supervisory salaries). These costs fall into the general sub-categories of direct labor, materials, and overhead. Cost of goods sold is the total of all costs used to create a product or service, which has been sold. ![]()
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